Europe aims to beef up crisis fund

Published: 25 September 2011 6:00 AM

US Treasury Secretary Timothy Geithner (right) talks to European Central Bank President Jean-Claude Trichet before the International Monetary and Financial Committee (IMFC) meeting during the annual IMF-World Bank meetings in Washington on September 24, 2011. — Reuters picWASHINGTON, Sept 25 — Europe is working on ways to boost the firepower of its bailout fund, top officials said yesterday, after the United States, China and other countries urged swift action to contain its debt crisis.

With financial markets plunging on fears that Greece‘s near-bankruptcy could spread to other euro zone countries, European policymakers were seeking to prevent a repeat of the kind of financial chaos that swept the world in 2007-2009.

The European Union’s top economic official, Olli Rehn, said as soon as governments confirm new operational powers for the €440 billion (RM1.883 trillion) fund, known as the EFSF, attention will turn to how to get more advantage from the existing money.

“As one part of the next stage we are contemplating the possibility of leveraging the EFSF resources to have more firepower and thus have a stronger financial firewall to support our member states,” he said.

Another official said Germany would not agree to expanding the rescue fund’s size, so leveraging it was necessary. “We need to find a mechanism where we can turn one euro in the EFSF into five, but there is no decision on how we could do that yet,” the official said.

The United States and other countries have urged Europe to leverage up the fund, possibly with support from the European Central Bank.

The International Monetary Fund’s steering committee said in a statement the euro zone would do whatever was necessary to resolve the single currency bloc’s sovereign debt crisis.

The IMF warned that the global economy had “entered a dangerous phase, calling for exceptional vigilance, coordination and readiness to take bold action” to cope with Europe’s crisis and prevent it infecting others.

Greece is at the forefront of the crisis that has struck a number of countries on the 17-nation euro zone’s periphery. Debt-laden Italy, the third-biggest euro zone economy, has also struggled to retain investor confidence but Italian Economy Minister Giulio Tremonti insisted yesterday its financial house was “in order.”

US Treasury chief Timothy Geithner, in his most explicit warnings to date, said the ECB should take a more central role in fighting the crisis.

“The threat of cascading default, bank runs, and catastrophic risk must be taken off the table, as otherwise it will undermine all other efforts, both within Europe and globally,” he told the IMF steering committee.

Calming nerves

Markets have been wracked by fears the Greek debt crisis could overwhelm other euro zone countries and banks.

Investors took some comfort on Friday from signs of new resolve by European officials, in Washington for meetings of the IMF and World Bank, to bolster their defences after nearly two years of what many see as half-hearted action.

“It is encouraging that ... European officials are signalling a better appreciation of the depth and potential consequences of the crisis,” said Mohamed el-Erian, co-chief investment officer of bond giant PIMCO.

“Now they need to translate this into decisive actions underpinned by a common vision of what they want the euro zone to look like in five years time.”

Many policymakers now talk openly of a possible Greek default and the need to move much more aggressively to prepare for it.

“Decisions as to how to conclusively address the region’s problems cannot wait until the crisis gets more severe,” Geithner said.

His warning was echoed by China’s central bank governor, Zhou Xiaochuan, who urged quick action to bring greater financial stability to the European region.

“The sovereign debt crisis in the euro area needs to be resolved promptly to stabilise market confidence, and forceful and credible fiscal consolidation measures are needed in relevant economies to alleviate sovereign debt stress,” Zhou told the IMF.

Battening the hatches

The meetings of top finance officials were dominated by worry about the risk Europe poses to the rest of the world.

A default by Greece could cause a domino effect in other highly indebted euro zone countries, officials fear, putting at risk Europe’s banking system given the size of holdings of debt issued by weak European nations.

Canada’s central bank governor, Mark Carney, told Canadian radio that the euro area’s bailout fund should be more than doubled to “the neighbourhood of a trillion euros.”

Greek Finance Minister Evangelos Venizelos told reporters that Athens was determined not to default. “Greece is determined to honour all its obligations. No Greek paper will ever go uncovered.”

Greece is in tense talks with the IMF and European authorities to secure a new 8 billion-euro instalment of its rescue package.

In return, Athens has pledged deep austerity measures but negotiators are frustrated at what they say is Greece’s slow reform pace. October’s loan payment, however, is still widely expected to be made. The next instalment is due in December.

To battle the crisis, Geithner wants more cooperation among European policymakers — who set their own tax and fiscal policy — and their central bank, which is mandated to focus on keeping inflation low.

One option to increase the potency of the EFSF would be for the ECB to commit large amounts of funding, with the temporary bailout fund putting forward money to cover potential losses.

But some ECB officials are wary of playing a more active role in battling the crisis. A board member of Germany’s central bank, the Bundesbank, suggested the time was coming for the ECB to stop buying government bonds.

“I think the time is coming for this to stop,” said Joachim Nagel, adding that the ECB’s bond buying was only supposed to be a temporary measure until the euro zone’s bailout fund is beefed up with powers to buy bonds and lend to governments.

In another sign of Europe considering new measures to tackle the crisis, a senior lawmaker from German Chancellor Angela Merkel’s conservatives said the euro zone’s permanent rescue mechanism should be introduced sooner than mid-2013 to beef up private creditors’ response to the Greek debt crisis.

Germany, as the strongest economy in Europe, needs to play a central role in any effort to curb a debt crisis, but public opinion there has turned against further big bailouts for fellow euro zone countries.

Finance Minister Wolfgang Schaeuble said yesterday he will meet Venizelos while in Washington for the IMF meetings.

“We are permanently in contact and talk a lot,” Schaeuble said, a day after Merkel said a Greek default was not an option for her.

Venizelos was quoted by two newspapers on Friday as saying an orderly default with a 50 percent haircut for bondholders was one way to resolve the heavily indebted euro zone nation’s cash crunch. — Reuters

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